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In re Park Beach Hotel Bldg. Corp.

April 28, 1938


Appeals from the District Court of the United States for the Northern District of Illinois, Eastern Division; John P. Barnes, Judge.

Author: Lindley

Before SPARKS and MAJOR, Circuit Judges, and LINDLEY, District Judge.

LINDLEY, District Judge.

Appellant, receiver in a state court proceeding, seeks a reversal of an order entered in the District Court in course of administration under section 77B of the Bankruptcy Act, 11 U.S.C.A. ยง 207 and note, wherein the court decreed that the receiver's petition for additional compensation be denied; that within a certain period he pay to the trustee certain sums; and that his final report and account be denied approval until such sums should be paid.

Foreclosure of a mortgage upon debtor's property, consisting of an apartment building, was instituted in 1931 and still pending in the state court without final disposition when certain of the bondholders filed in the District Court, on May 22, 1935, their petition for reorganization. The debtor entered its appearance, admitted the averments of the petition, and consented that the relief prayed should be granted. On July 26 the court approved the petition and appointed a temporary trustee, making the appointment permanent on August 22, 1935. On February 7, 1936, a plan of reorganization was approved. Following this, all proceedings necessary for the promulgation and completion of the plan were completed. A final decree was entered finding the plan of reorganization to have been completed, the securities distributed, and previously existing mortgages and liens released. No appeal has been taken from any of the orders entered other than that here involved.

Following appointment of the temporary trustee, appellant, who had been acting as receiver in the state court proceeding, surrendered possession of the real estate to the trustee. Thereafter on October 11, 1935, he filed his petition in the District Court, reporting that he had held possession of the property from February 28, 1934, to July 5, 1935, and that on the 10th day of September, 1935, he had caused to be filed in the state court his final account and report and that that court had approved his report, including an allowance to him for additional compensation for services rendered. He further reported that certain claims against him as receiver remained unpaid and prayed that the court direct the trustee to pay him the additional fees allowed by the state court, prior to payment of the claims of all other creditors, and that the unpaid claims due be allowed as costs of administration. On November 27, 1935 the bondholders' committee filed a petition praying for an order upon appellant to file an account and report of all his acts during the receivership. The court directed appellant to file within five days a full and complete report and account of all receipts and disbursements and a full report of all his acts as such receiver and ordered that the trustee and all parties in interest might object thereto within ten days thereafter. On November 29, 1935, the court directed to be impounded all books, vouchers, checks, files and other records that day surrendered by appellant; named auditors to examine the books and directed that an auditor for appellant be permitted to be present at such examination.

On December 21 the court referred to one of the referees as special master the inquiry and investigation as to appellant's acts, directing the master to proceed with the investigation and inquiry into "all matters and things relating to said receivership and the accounts, actions and disbursements" of appellant, and relating to "all matters touching the account and accounts of the said receivership, and any and all matters touching on the method of handling the accounts and moneys belonging to the said estate, and any and all other transactions, items, and accounts that * * * might affect the said receivership transactions, and each of them." The court directed that the investigation should "in no way be limited," but that it should "include a complete investigation of the books, records, papers and effects" of appellant.

On August 26, 1936, the special master filed his report, in which he found that appellant, in violation of his duty at common law and under the rules of the state court, had commingled the income of the debtor with funds of many other trust estates and of privately owned property, had kept confused and misleading books of accounts relating to all estates and properties and no bank accounts and had transferred various estate funds to a safety deposit box, held in the name of his wife, to which his son had access.

He concluded that a receiver who so conducted his affairs should be charged with the expense and cost of the proceedings necessitated by his actions and compelled to return fees received by him and that appellant was, therefore, indebted to the estate for the following sums: Fees allowed and received, subsequent to approval of the petition in federal court, $700; court report's fees, necessitated by the hearing, $564.75; cost of the audit of appellant's books, $991.60; and such fees to the attorneys and special master as should be allowed by the court; and recommended a decree for such relief.

The master reported that in the course of his administration as receiver, appellant had switched the laundry service from a company charging 2 1/2 cents per pound to one charging 4 cents per pound. Appellant claimed that the change was made on account of his suspicion that the first company was using caustic soda, but the evidence shows that this suspicion was not well founded. Attorney fees allowed to the receiver's attorney in the state court were assigned to one Frank, a nephew by marriage of appellant, and Frank made a profit of $100 thereon. The master reported that the record abounded with accusations and suspicions concerning appellant's administration. He said that many of the transactions were of doubtful character and that no fiduciary who became involved in such manner could reasonably expect to escape criticism. He commented that business dealings between a receiver and his relatives, friends, or political associates may be predicated upon an intent to serve the estate in the most efficient manner possible, yet that, human nature being what it is, third persons could hardly avoid suspicion as to the ultimate destination of the profits; but he concluded that the committee, which produced the evidence, had failed to establish, by a preponderance of the evidence, misappropriation.

He added, however, that it did not follow that the administration of the receivership should meet with full approval. He pointed out that appellant was dealing with a trust fund; that it was his duty to keep this separate from his own and other funds; that his failure might have been due to ignorance or to a well-conceived plan for the spoliation of his trust. The master was of the opinion that the administration should be severely censured and that appellant should be disciplined by imposing upon him all costs necessarily incurred in the proceedings and by compelling him to refund all fees obtained by him as receiver over which the District Court might have jurisdiction. He pointed out that payments aggregating $700 were made after the federal court acquired jurisdiction; that at that time appellant had no right of control (or authority) over the funds of the estate; and that by such withdrawal he had, at least technically, committed a conversion.

Objections and exceptions to the report were filed by both appellant and the bondholders' committee, the latter insisting that the master should have found actual misapplication of funds.

On October 6, 1936, the attorney for the bondholders' committee filed his petition setting out in detail the services rendered at the hearing before the special master in connection with the accounting and praying for an allowance of $1,750.

Upon hearing the master's report and exceptions thereto and the petition for fees, the judge announced that he had examined the testimony; that he could not reconcile the receiver's conduct with honesty of purpose, but that all doubtful points he would resolve in favor of the receiver; that what the latter paid on account of his own services and those of his attorney on allowances by the state court, made after the filing of the bankruptcy proceedings, should be returned; that the receiver had so kept his accounts and so commingled the funds of various estates, as to necessitate the investigation and consequent expenditure of money in order to determine the correct status; and that he should be charged with all the cost thereof. The judge allowed counsel for the bondholders' committee $1,000 for services in connection with the hearing; the special master $300 and $100 expenses and the auditors ...

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